• February 18, 2018
    Last updated 6 minutes ago

retail

Why food franchising deals can leave such a bad taste

So much of demands are built in that it is next to impossible to meet them

By Sanjay Duggal, Special to Gulf News
14:32 February 5, 2018

Humans have an intimate connection with food that goes well beyond nourishment of the body and pleasure of the palette. It is hence no accident that food service forms the single largest segment of the franchising industry, by far.

Widely viewed as a cash cow, food franchising has spawned a thriving ecosystem of franchisers, investors, vendors and service providers. However, with the socio-economic landscape transforming rapidly, and competition getting stiffer, many are struggling to cope with change and remain relevant. The result is a growing number of franchise players with diminished faith in their longevity, and consequently, a franchising space increasingly fraught with greed and which sometimes borders on deceit.

While this may be perceived as a grim and somewhat cynical assertion, there are countless examples that lend it credence and context. Here are a few:

* Underfunded F&B operators

Multi-unit restaurant outfits whose staff and vendors haven’t been paid in months are not uncommon. Many such companies also receive “notices to cure” from malls with alarming regularity due to rent defaults. One would rightfully assume that these are prime candidates for imminent closure and, yet, many of them can be seen inexplicably promoting franchising at trade shows.

* Franchise programme developers

There are several companies that specialise in developing bespoke franchise documentation and training programmes for independent brands aspiring to franchise their operations. Many of them are known to use indiscriminate cut-and-paste tactics in producing operations manuals at prohibitive costs to their clients. What’s more, finding remnants of their previous client’s name and work in parts of the new customised manuals are a frequent complaint.

* Franchise brokers

These are companies that provide a vital service to the franchising community by connecting franchisers and investors. Usually, they prefer calling themselves consultants than brokers. Brands can pay up to $15,000 (Dh55,095) as an annual representation fee, with a hefty success fee to boot.

With a modest success rate, the majority end up paying for opaque databases. Beyond that, the client gets almost no interaction with the broker all year.

* Unofficial brand representatives

These are typically individuals connected to the owner of a brand at a personal level, and have semi-official rights to it. Although the brands might be popular in their country of origin, they normally have a minimal franchise infrastructure and therefore need this unusual method to grow. Investors are expected to put up the complete initial investment, give up some of their equity, pay a top- and bottom-line fixed percentage and stay out of management.

Feasibilities are often fuzzy math and there are no clauses protecting the investor from the operator’s mismanagement of cash flow.

* Consulting firms dispensing dubious statistics

Most brands in the region’s F&B domain are in private hands, that don’t need to share their numbers. And they don’t. Yet, consulting/research firms routinely endorse estimates and opinions of their interviewees as fact, and even present them in their widely published annual F&B reports.

* Real estate developers/mall managements

Although associated with retail in a much broader sense, they rely heavily on food service franchises for volume occupancy across their properties. A pre-eminent real estate developer recently took the heights of inventiveness by offering an ever so slight empty sliver of space with no services to a confectionery franchise. In their offer, however, they projected this space as leasable, with the same prohibitive square foot rates as rest of the mall!

* Fledgling franchisers

Even brands with less than a dozen units routinely make demands disproportionate to their brand equity. This includes collective royalty and marketing contributions of up to 10 per cent, besides considerable area development and unit fees that is. Moreover, supply chain stipulations can be very rigid, mandating expensive import for the most mundane of items.

The sceptic may argue that investors aren’t coerced into buying, so the principle of caveat emptor (buyer beware) should prevail. However, as opposed to other industries. the lack of regulation in franchising makes them more susceptible to devious intent.

Only diligence can protect investor interests. So, the next time a franchiser claims that its brand is the best thing since sliced bread, the investor should research five names in that category and ask what specifically makes it better than them. When they quote a franchise fee, they should be asked to break it up to understand what is being paid for.

And when they demand 7 per cent royalty and 3 per cent marketing a justification should be demanded (or that could be all of your profit right there).

Ultimately, if parties do manage to meet each other half way with integrity, mutual trust and conviction, franchising certainly can be best thing since sliced bread.

Sanjay Duggal is Vice-President for the Middle East and North Africa Franchise Association.